The opinion
FeatherstoN, /., dissenting: I respectfully dissent. In my opinion, the majority’s interpretation of section 911 leads to illogical results in at least two respects. First, if petitioner had earned as much as $1 of net profits, for example, a maximum of 30 cents would have been excludable from her gross income as reasonable compensation for her services; however, because she suffered net losses, large amounts— over $11,000 in 1 of the years — are here excluded from her gross income as theoretically reasonable compensation for her services. In every case, the amount of “allocable” deductions to be disallowed under the section is geared to the “amounts excluded from gross income.” I see no logic (or statutory support) for this wide discrepancy. Second, petitioner receives no tax benefits whatever under the exclusion provisions of section 911; yet under the majority’s reasoning she is denied deductions for which she would admittedly qualify if she had lived at least part of each year in the United States. This conversion of section 911 from a benefit to a penalty provision, in my opinion, subverts its purpose — to promote foreign trade by encouraging citizens to live and work abroad.
These anomalies are not required in order to achieve the legislative objectives of section 911. The reason for disallowing the deductions allocable to the amounts excluded from gross income under section 911 is to avoid allowing the double tax benefits of both the exclusion of income and the deduction of expenses incurred in earning exempt income. But entrepreneurs obtain no tax benefits whatever under the section unless they realize net profits from their foreign business. The language of the last sentence of section 911 (b), taken from the definition of earned .income first adopted as part of the Revenue Act of 1924, was quite clearly intended to put entrepreneurs, specifically farmers and small businessmen, on an equal footing with employees. See 65 Cong. Rec. 2849-2854 (1924). That purpose was achieved by keying a service-capital entrepreneur’s excludable earned income to his “net profits” — the only possible source of any “reasonable compensation” for personal services, any return on his capital, or any tax benefit under section 911. To say that a service-capital entrepreneur who incurs a net loss from operating his business nevertheless earns some theoretical amount of compensation is to say that all of his net loss plus his theoretical compensation are attributable to his capital investment — a wholly unrealistic concept. I do not think the section was intended to deny otherwise allowable deductions where a taxpayer operating a service-capital business abroad realizes a net loss.
The words, “not in excess of 30 percent of his share of the net profits of such trade or business,” should be read as an integral part of the last sentence of section 911(b), not merely as a limitation which comes into play only when there are net profits. Thus, if a foreign service-capital business conducted by a U.S. citizen, resident abroad, earns sufficient revenues to produce net profits, the exclusion for compensation for services may not exceed 30 percent thereof, and the deductions allocable to the amounts so excluded are denied; however, if the same business endeavor results in an operating loss, no amount is excluded from gross income and no deductions are disallowed under section 911(a).
This reading would avoid subverting tbe purposes of section 911, i.e., making it a potential penalty provision rather than a tax benefit; would be consistent with the legislative objective of placing entrepreneurs on the same footing as employees; and would avoid the complications resulting from interpreting the same statutory language one way in applying one section and another way in applying another. Cf. Warren R. Miller, Sr., 51 T.C. 755 (1969); sec. 37; sec. 1348.
Withey and Forrester, JJ., agree with this dissent.